Federal Bank: Redefining banking digitally and sustainably

Federal Bank is one of the leading and preferred Personal, NRI and business banking partners for customers across India. The retail banking segment provides deposits, mortgage-backed housing loans, retail loan against property (Retail LAP), auto loans, cards and payments, non-resident banking and wealth management services.

The business banking segment provides business loans primarily to Micro, Small and Medium Enterprises (MSMEs). The CV/CE segment finances single unit owners, fleet operators and strategic clients for their purchase of new and used commercial vehicles and construction equipment. The agri banking segment focuses on providing financing solutions to the agriculture and priority sector.

Profitability

• Highest ever operating profit at 1274.21Cr, grew 39% YoY.
• Highest ever net profit at 803.61Cr, up 54% YoY.
• NIM further improved to 3.49%, higher by 22 bps YoY and 19bps QoQ (35 Qtr High).

Strong momentum in credit growth

• SME book grew by 20% YoY
• Retail book up by 18% YoY
• Business banking book up by 18% YoY
• Corporate book up by 19% YoY
• Commercial credit book grew by 18% YoY
• CV/CE business grew by 65% YoY

New initiatives

• Reimagined agri credit through Instant KCC.

• MFI footprint now in over 12 states/UTs with 11 active BC partnerships.

• Went live with Epifi to offer PLs.

• Added 28 new branches including a DBU.

• First bank to launch cross border BBPS.

Steady growth in market share

• Market share in advances at 1.26% (all time high).

• Market share in deposits at 1.12%.

• Market share for individual inward remittance at 20.36% (HY).

Credit cost improves further on the back of continued strong asset quality. Broad based asset growth coupled with core revenue profile drives-up RoA on fast track.

Company is benefited from a timing difference in asset/deposit repricing, offsetting higher employee opex (provision for wage revision) and higher provisions for security receipts as per the RBI circular. FB is confident of leveraging its differentiated FinTech ecosystem partnerships to clock market share gains in high-yield segments and driving further business productivity on both sides of the balance sheet.

The company appears to be on track to deliver its targeted RoA of 1.25% for FY23 and is likely to clock a further 10 bps RoA accretion over the next couple of years as the bank further calibrates the mix of high-yielding loans.

Federal Bank reported its highest-ever quarterly earnings, largely on the back of strong loan growth (+20% YoY), margin expansion (+19 bps QoQ), sustained fee traction and lower credit costs. FB benefitted from a timing difference in asset/deposit repricing, offsetting higher employee opex (provision for wage revision) and higher provisions for security receipts as per the RBI circular.

FB is confident of leveraging its differentiated FinTech ecosystem partnerships to clock market share gains in high yield segments and driving further business productivity on both sides of the balance sheet. FB appears to be on track to deliver its targeted RoA of 1.25% for FY23 and is likely to clock a further 10bps RoA accretion over the next couple of years as the bank further calibrates the mix of high-yielding loans.

Fintech landscape

Mr. Shyam Srinivasan, Managing Director & CEO, said, “An all-round strong operating performance has helped us deliver the highest ever quarterly profit of 804Cr. Credit Cost has improved on the back of continued strong asset quality, with GNPA and NNPA at 2.43% and 0.73% respectively. Broad based asset growth of 19%, coupled with core revenue profile has yielded in higher ROA, currently at 1.33%."

Major investments

Launch of Digital Banking Unit: In Salt Lake, Kolkata - inaugurated by our Hon’ble Prime Minister via Video Conference on 16th October 2022.

Cross Border BBPS: Launched in Global Fintech Fest – First Bank to launch this service. This will facilitate NRIs to undertake utility, education, and other bill payments on behalf of their families in India.

GST- Payment facility

This will enable customers to make GST payments via E-payment (Retail Fednet), Over the Counter (Cash, Cheque and DD) and NEFT/RTGS (online/offline).

Steady decline in stressed asset formation and adequate coverage at >65% on existing NPL portfolio to ensure lower credit cost. Despite second / third covid wave led disruptions, FB has successfully delivered on its asset quality guidance (FY22 cumulative slippages of ₹18.8 bn vs guided range of Rs18bn20bn). It started FY23 on a strong footing with stressed asset formation falling to 2% in Q2FY3 vs 2.22% in Q1FY23 vs 2.3% in Q4FY22.

Slippages from the restructured book stand lower at Rs1.4 bn (~9% slippage ratio) vs management expectation of 2025% during H1FY23. PCR remains strong at 69%, which reinforces our view that FB would manage credit cost within the guided range of 50-70 bps in FY23.

Scaling up of new asset products to remain a key focus area going ahead. Management stated its strategy to incrementally focus on profit maximisation given the improved business environment. Towards that end, it is planning to scale up high yielding retail products such as CV, MFI, PL, credit card, etc.

Shuchi Nahar is a Certified Research Analyst. She can be found on Twitter at @shuchi_nahar

Note: This article is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related investment-related decision.